If, 100 years from now, a historian were to study the period from 2008 to 2013, some key phrases would probably emerge: market crash, political scrutiny, regulatory change, damage to reputations. Few have been better placed to view these forces play out in real time as those who work within the banks’ in-house legal teams.

All the hallmarks of the past five years have touched on those working as internal counsel. The demise of European securitisation, the increase in insolvency and restructuring, the slew of regulatory initiatives, the self-inflicted reputational damage and the growth in new markets – such as the European high yield – have all altered the way in which in-house counsels operate.

As market forces have penetrated organisations and forced their reliance on in-house counsel, so has the need for cost-cutting, with private practice lawyers now being put under more pressure to work for lower fees or to provide better-value services.

Charlie Beauchamp, general counsel for corporate and investment banking and capital markets origination at Citigroup in London, said: “The [in-house] role is more critical than ever.

We add value by understanding the legal, political and regulatory environment. We have to be close to the business because of the nature of what we do, and we also have to be close to the risk organisation and understand the risk appetite of the firm.

“We sit in the middle of the information flow. We’re involved in all the deals, we understand the risk appetite, we understand the business imperative. We are positioned right at the centre of things.”

The traditional role of the internal legal counsel has been twofold: to provide execution support on transactions, and to ensure the employer has robust controls.

The demand for the former in recent years has dissipated, while the latter has only grown in importance, changing the nature of the role and elevating it in importance.

Nimble

Bert Suer, head of investment banking legal for Europe, the Middle East and Africa at UBS, said: “Post crisis, there has been a greater emphasis on control rather than just legal advisory and execution. The job now requires us to identify risk in the broadest sense, rather than just advise on the law and execute transactions.

“Ten years ago, in-house transactional lawyers were seen really as part of the deal team, with the main objective being to get the deal over the line.

That is clearly still important, but now there is a real recognition we need to perform more of a challenge function. That requires a change in mindset for both the in-house lawyers and the front office.

“In-house lawyers these days still need to be able to focus on the detail of the transaction. But also they need to be intellectually curious, keep up with the constant stream of new law and regulation, and keep an eye on and tackle the gamut of risks that are out there.

These may require escalation: for example competition, anti-money laundering, sanctions, cross-border, information barriers, or more general reputational concerns.”

The in-house teams have had to adapt to the changing environment during a period of downsizing, with the shrinkage in teams matching the fall in volumes and the reduced number of bankers. Those that remain now work across a broader range of transactions.

Beauchamp said: “We are deliberately broad in our coverage, as it gives people greater breadth and it gives our people a greater understanding of the broader business, but it also means we can move resources around.

In 2007 and 2008, we had people who were working on lots of securitisations, and then there weren’t any of those. Instead, there were lots of insolvencies and workouts, and so we shifted resources away from securitisation and transaction execution very quickly.”

This view was echoed by Karin Melson, an executive director in investment bank legal counsel at UBS, who said: “My role as an in-house DCM lawyer has changed in that I have had to be more flexible, and to cover whatever work my internal clients and the market dictate, but in truth that is the attraction of going in-house.”

The same pressure driving the downsizing – the need to rein in costs – has also changed the banks’ relationship with their external counsel, with lawyers complaining the banks expect more for less.

Beauchamp said: “Costs are under the microscope, and we certainly do seek to receive value from our external law firms. I use the word value deliberately. It isn’t just a matter of low cost, although this is important.

There are all sorts of other ways through which law firms invest in the relationship they have with clients, through free advice, or putting caps on bills, or training and secondments.”

Preferred providers

Under the legal panel system, each bank will have a list of preferred providers, with those included on the panel often asked to provide fee discounts, and to make a commitment to certain value-added services, with the demand for secondees in particular increasing.

One in-house lawyer said: “We’ve tried to use secondees, but we all face a familiar problem: you tend be short in an area or need to plug a gap when the market is busy, which is precisely the time the law firms are more reluctant to provide that service. It is something we try and regularise with the law firms.

We acknowledge it isn’t easy for them, and that there is a big opportunity cost for law firms in providing secondees. We’re seeing that law firms are having to justify the provision of the secondee internally.”

Some banks have gone so far as running reverse auctions for more commoditised pieces of work, with a number of law firms invited to bid, and the bank choosing the provider with the lowest fee.

While this has unsurprisingly raised some concern among those in private practice, Beauchamp said relationships would continue to be key.

Beauchamp said: “It is still a relationship-driven environment, and I think that people will work with people they know and trust.

There will always be a number of firms that can do a particular piece of work, and the firm you give that to is driven by the relationship you have, as well as by the cost of the piece of work.

We have to make sure we are delivering value for the firm, as well as making sure we have the best advice available for a certain piece of work.”

• Law firms adapt to new demands

In the boom years, investment banks had little cause to concern themselves with the exact financial metrics of their relationships with their external legal advisers. As they rein in costs, however, in-house lawyers are being asked to get a handle on the value they receive from their external advisers, and in the process help develop a relationship which is beneficial to both parties.

One in-house lawyer said: “We’re trying to be a bit more sophisticated about how we use law firms, and look at the relationship in the round. We’re trying to get more data around how we use the firms, and in which product areas.

There is a desire from a financial perspective to extract more value, and we can do that in a number of different ways. We are trying to be a bit more holistic about it.”

The pressure on costs has led to aspects of the legal services market becoming commoditised, with reverse auctions used in some cases to force down fees. As a result, lawyers are, in turn, having to put more focus on their own internal margin.

David Collins, partner and head of corporate finance at Berwin Leighton Paisner, said: “None of us were trained to be project managers, but more professionalised project management within law firms is becoming an essential ingredient in the timely delivery to clients of a high-quality product at an acceptable internal margin.

The traditional billable hour basis of charging for some types of work has become somewhat anachronistic, and it is now much more common to see a fixed-fee or a structured-fee model, which increases in the case of a successful deal.”